Nio's Stock Downgraded By JPMorgan Due To Overly Optimistic Expectations

After Nio's latest quarter, JPMorgan recommends stepping away from the Chinese electric vehicle maker.

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Analyst Nick Lai downgraded Nio's stock from overweight to neutral and said it will become more and more challenging for the electric vehicle maker to deliver on its high expectations as time goes on. Due to a contraction in vehicle margins, according to him, the firm's fourth-quarter results were a miss.

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“Management, during the result call, attributed the majority of the missed sales to a one-time item related to clearing of old models (i.e. the ES6, ES8, and EC6) before the new models on the new platform arrive in 1H23. There is a risk that 1Q23 margins will continue to decline (JPMe vehicle GPM about 5%) whereas the magnitude of the improvement from 2Q23 will be short of street expectations, given a challenging competition environment,” Lai wrote to clients on Thursday.

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“Furthermore, our 2023 delivery forecast (190k units or 56% growth) falls short of management's ambitious goals (240-250k, doubling from 122 in 2022),” Lai added.

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Shares of Nio are down more than 9% in 2023, following a roughly 70% drop last year. Nio lowered its fourth-quarter outlook for deliveries in December, citing disruptions to the supply chain caused by Covid outbreaks in China as a main reason for the change.

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This analyst's new price target for December-2023 is $10, down from $14, which implies an upside of approximately 13% for the stock in the next few years. During Thursday's pre-market trading session, the stock fell a little more than 1%.

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The analyst does believe that there will be a greater volume momentum in the second half of 2023 due to the introduction of new vehicle models, as stated in the note. However, as a result of Tesla's recent price reductions, the broader EV industry will be under greater pressure to offer lower prices to attract more buyers.

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“Our view of the stock is that it will probably trade sideways in the near term, and we will reassess a potential inflection point in mid-late 2Q23, depending on the magnitude of sequential volume and margin improvement, since street expectations are too high, which gives us a reason for being cautious”. According to Lai, there is a surprising bias toward the downside rather than the upside.

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The stock was not the only one to be downgraded by Wall Street firms, JPMorgan was not the only one. As part of the same move, Barclays cut its price target to $10 from $18 in a note released on Wednesday. The firm also upgraded its rating to equal weight from overweight, saying that it does not expect "large spending to slow down anytime soon."

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